US Trade Deficit With China

Thinking About Our Trade Deficit With China
Submitted by Robert J. Shapiro on Fri, 04/13/2007 - 11:19am. Economy | Globalization

As the United States files a major case at the World Trade Organization charging China with wholesale piracy of U.S. intellectual property, especially copyrights covering books, music and videos, let’s pause and think about our trade deficit with China. The administration is entirely right to file the case – though a little late, given that it’s only our third complaint with the WTO over intellectual property violations since George W. Bush took office, compared to fifteen cases filed at the WTO by the Clinton administration in its second term alone. We’ll get to why those violations matter economically, but first let’s look at an even bigger picture.

It may not be politically satisfying, but the truth is, we cannot blame any other country’s trade practices for the size of our trade deficit. We run trade deficits for one reason: We consume more than we produce and then purchase the difference from abroad. When China sells paper or t-shirts for less than they cost to produce and ship them here, it increases our imports of Chinese paper and t-shirts, hurting American workers and companies that still produce them here. But if China charged three times as much, and we bought more paper and t-shirts from American or other foreign suppliers, it could affect the composition of our trade deficit, but not its overall size: That’s because the size is locked in by how much we consume of everything, relative to how much we produce of everything. The only way to reduce the trade deficit is to either consume less – which is what economists mean when they say that the answer is to save more – or to produce more. It’s used to be the case that the two were closely linked: In order to produce more, you had to invest more, and to invest more, you had to save more (and so consume less). Global capital markets have changed that for the United States, where everyone wants to invest: Now, we can invest more even without consuming less – we just have to borrow the investment funds from foreign savers. There’s a big cost down the road, since foreigners end up owning more of our companies and real estate, and then taking home their profits and rent – but at least we get to invest.

Force China to play fair with her trade policies (if we can, which is often doubtful), and we’ll end up importing a little less from China and exporting a little more to China. But unless we also begin to consume less overall or to produce more overall, it won’t affect the total trade deficit at all. There is one, possible way it could do so -- if demand for our exports to China goes up, it may lead to greater production at home to fill the need (after it had led to greater investment to expand production) -- and the increase in our production can bring down the trade deficit.

The one exception to all this is what the administration is finally focusing on -- foreign violations of the intellectual property rights of American producers. If we could get China, India, Russia and Brazil (the four biggest offenders) to stop appropriating or pirating our pharmaceuticals, software or music and films, it would directly reduce our trade deficit. Our own consumption wouldn’t change, but foreign payments back to U.S. companies would increase, just as if our production had increased and all been exported. Stealing our intellectual property, in short, has the effect of reducing our production (more precisely, taking part of our production and pricing it at nothing), which in turn drives up the trade deficit.

So, now there are two reasons to crack down on intellectual property violations by our trading partners. It’s the only cost-free way to reduce our trade deficit, and it should increase the returns and incentives for producing more of it, at a time when globalization and technology make intellectual property a central factor in U.S. economic growth and progress.

One more word on our trade deficit with China: Half of it comes from U.S. companies bringing back products they’ve produced in China by their Chinese subsidiaries. China’s currency is undervalued by all the standard economic measures. But if China does revalues its’ currency, so its exports become more expensive, it will raise the price of products produced by American companies there for sale here – and by itself can’t affect the overall trade deficit.
» Robert J. Shapiro's blog | login or register to post comments

User login
Username: *
Password: *

* Create new account
* Request new password

Search
Navigation

* recent posts

Places We Go

AMERICAblog

American Prospect

Blue Fund

Center for American Progress

Daily Kos

Daou Report

Democracy Arsenal

Democracy Journal

DLC

Economist's View

Emerging Democratic Majority

Eschaton

Firedoglake

Glenn Greenwald

Goodstorm.com

Huffington Post

Joe Trippi

Matthew Yglesias

Media Matters

MoveOn

MyDD

New Donkey

New Republic

PoliticsTV

PPI

Salon

Talkingpointsmemo

ThinkProgress

TPMCafe

Washington Note

World Changing

©2006 NDN and the NDN Political Fund.
Paid for by NDN and the NDN Political Fund and not authorized by any federal candidate or committee.
901 15th Street NW, 7th Floor, Washington, DC